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January 16, 2012

Raising Age for Social Security, Medicare Would Cut Both Ways: CBO

CBO released three projections for raising various eligibility ages and they showed spending would be reduced but so would access to health care

Social Security checks being processed. (Photo: AP)

The Congressional Budget Office released on Jan. 11 an issue brief describing the effect of increases in the eligibility ages for Social Security and Medicare. The CBO found that raising the Medicare eligibility age or the early or full eligibility age for Social Security would reduce federal spending and limit the number of people with access to health insurance.

While the retirement age under Social Security’s Old-Age and Survivors Insurance program has been increasing slowly since 2000, the Medicare eligibility age has remained the same since the program began in 1966. Raising the Medicare eligibility age, which is currently 65, would reduce the number of people eligible for benefits, although CBO expects “most people affected by the change would obtain health insurance from other sources,” such as employers or other government programs. Federal spending on those other programs would offset the savings incurred by raising the Medicare age.

Furthermore, many of the people who would have enrolled in Medicare at 65 would face higher premiums, higher out-of-pocket costs, or both, the CBO predicts.

CBO estimates the effect of a gradual increase in the Medicare eligibility age on health insurance coverage:

If the eligibility age is increased by two months every year beginning in 2014 for people who were born in 1949 until the age reaches 67 in 2027 for people born in 1960, of the 5.4 million people who would be affected in 2021, about 5% would become uninsured, the CBO predicts. About half of those would obtain insurance through their employer or their spouse’s employer. The remaining 2.3 million people would receive coverage “in equal parts” through Medicaid, through Medicare disability benefits, or through the health care exchanges that will become available in 2014 through the Affordable Care Act.

While some people may be compelled to work longer until they become eligible for Medicare, CBO predicts that the health care exchanges available in 2014 will keep that number low.

The effect of the above example on the budget would reduce spending by $148 billion from 2012 through 2021, the CBO found. By 2035, net spending would be about 4.7% of GDP, rather than 5%.

Another effect of increasing the eligibility age for Medicare is the increase in spending on Medicaid, CBO notes. As fewer people would be able to take advantage of Medicare, they would turn to Medicaid for primary coverage until they reached the Medicare eligibility age. The effect of increases in Medicaid spending, as well as the cost of health care exchanges and Social Security retirement, would offset savings incurred by raising the Medicare age by about one-quarter, reducing savings to $113 billion over the next 10 years.

According to the CBO, more than half of Social Security beneficiaries claim benefits early at age 62, and almost 60% claim benefits before 64. Raising the early eligibility age for Social Security from 62 to 64 would therefore force many people to claim benefits later than they otherwise would. Those people would receive larger benefits for a shorter period than if they claimed at 62, thus balancing the effects of raising the eligibility age on a person with an average life expectancy, CBO estimates.

CBO estimates the effects of raising the EEA from 62 to 64 by two months per year while leaving the full retirement age unchanged. Spending would be reduced by almost $144 billion through 2021, according to CBO, just over 1% of projected Social Security spending. Outlays would be lower than under current law until 2035 after which they would be slightly higher.

CBO estimates that if the early retirement age is increased, people with lower earnings would see a larger reduction in living standards. CBO notes that between 5% and 20% of people who currently claim Social Security benefits at age 62 or 63 would become poor if the early retirement age increased. Furthermore, as people with lower earnings tend to have shorter lifespans, raising the retirement age would lower lifetime benefits.

The CBO also estimated the effect of increasing the full retirement age, currently 66 but scheduled to increase to 67 for people who were born after 1959. By gradually increasing the age to 70 by two months per year for workers born in 1973 or later, spending would fall by $120 billion through 2021. By 2035, spending would fall 4% from what would be spent under current law to 5.9% of GDP. By 2060, spending would fall by 13%.

An increase in the full retirement age would reduce benefits for those who claim at any age, CBO found. Retirees could delay claiming for the same amount of time as the increase and receive the same benefits that they are entitled to under current law. By claiming a few months ahead of the increase, they would receive a slightly lower benefit than they would under current law.

If the full retirement age is increased without an increase in the early retirement age, beneficiaries could suffer a significant increase in poverty. The CBO estimates that if the full retirement age is increased to 70 while the early retirement age remains 62, people who claimed at 62 would be entitled to just 55% of their primary insurance amount, compared with 70% they would receive under current law.

The CBO notes that it’s difficult to predict how people will behave if the eligibility ages are increased simultaneously. “Raising all ages at the same time would clearly encourage later retirement and result in a greater increase in the size of the labor force and total output than would raising a single age,” the issue brief states. “However, CBO does not have a basis for predicting the sign or magnitude of the interaction effects if the ages were increased simultaneously.”

The CBO imagines one scenario in which raising the ages together results in increased public awareness, resulting in a sharp shift in behavior and societal norms. Another scenario, however, could see the responses in changes to eligibility ages as “largely overlapping,” with a limited effect on behavior.

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